By Khushbu Lakhotia

India Ratings and Research (Ind-Ra) has affirmed Gallantt Metal Limited’s (GML) Long-Term Issuer Rating at ‘IND A-’. The Outlook is Stable. Instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based limits

-

-

-

INR500 (reduced from INR1,100)

IND A-/Stable/IND A2+

Affirmed

Non-fund-based limits

-

-

-

INR1,250 (increased from INR650)

IND A2+

Affirmed

KEY RATING DRIVERS

Strong Credit Metrics, Despite Decline in EBITDA Margin: Net leverage (net debt/EBITDA) was 1.4x in FY17 (FY16: 1.0x, FY15: 1.4x) and EBITDA interest coverage (EBITDA/gross interest expense) was 8.4x (9.2x, 5.4x). The moderation in the credit metrics was on account of a decline in EBITDA margin and an increase in debt in FY17. The EBITDA margin contracted to 8.5% in FY17 (FY16: 9.7%) due to an increase in raw material costs, coupled with a one-time increase in employee cost to arrest attrition levels. Besides, revenue continued to decline 7.9% yoy to INR6.2 billion in FY17 (FY16: down 7% yoy) because of lower realisations, amid flat sales volumes.

 

Total debt increased to INR741.8 million in FY17 (FY16: INR621.2 million) on account of increase in working capital requirements due to higher inventory. Ind-Ra expects GML’s net leverage to improve in FY18 driven by an improvement in the EBITDA margin.

 

Semi-integrated Plant: GML has a semi-integrated facility for manufacturing thermo-mechanically treated (TMT) bars with captive sponge iron and billets plants. It also has a captive power plant to meet the power requirement of the steel plants. Over the years, the company has shifted its revenue mix towards TMT bars from billets. TMT bars constituted over 95% of the total revenue in FY16 and FY17 from around 60% in FY13.

 

Strong Liquidity Position: The company recorded positive cash flow from operations over FY15-FY17 (FY17: INR210.3 million, FY16: INR503.7 million). Ind-Ra expects the cash flow from operations to remain positive in the near term on the back of strong EBITDA margins and stable working capital requirements. GML’s average maximum use of fund-based limits was 60%-70% during the 12 months ended June 2017.

 

Capex Plans: GML has envisaged a capex plan to increase production capacity of its TMT bars to 400,000mtpa (FY17: 257,400mtpa). The project will also include increases in the capacities of sponge iron, billets and power plants to meet the TMT requirements. The total project cost is likely to be around INR1,500 million, funded by a combination of internal accruals and debt. The project is likely to be completed in 2HFY19. While the capex is likely to lead to a one-time increase in the net leverage in FY19, it is likely to remain below Ind-Ra’s negative rating sensitivity of 2.0x.

 

Susceptibility to Commodity Prices Volatility: The company is vulnerable to fluctuations in prices of finished goods and raw materials since it has a limited bargaining power with its customers and suppliers. As a result, the EBITDA margin remained volatile between 8.5% and 9.7% during FY15-FY17. Besides, GML does not have any raw material linkages.


RATING SENSITIVITIES

Positive: A significant increase in the scale of operations along with the maintenance of the EBITDA margin and credit metrics at the current levels could lead to a positive rating action.

 

Negative: An increase in the net leverage above 2.0x or a decline in the EBITDA interest coverage below 3.5x on a sustained basis could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 2005, GML manufactures sponge iron, mild steel billets and re-rolled products (TMT bars). It also has a 33MW captive power plant. GML is promoted by Mr. Chandra Prakash Agrawal and is listed on the Bombay Stock Exchange and National Stock Exchange.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

21 March 2016

Issuer rating

Long-term

-

IND A-/Stable

IND A-/Stable

Fund-based limits

Long-term/Short-term

INR500

IND A-/Stable/IND A2+

IND A-/Stable/IND A2+

Non-fund-based limits

Short-term

INR1,250

IND A2+

IND A2+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Khushbu Lakhotia

    Senior Analyst
    India Ratings and Research Pvt Ltd Room No. 1201, 12th Floor Om Towers 32, Chowringhee Road Kolkata 700 071
    +91 33 40302508

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121